Lab Tests Auckland Ltd v Auckland District Health Board
[2008] NZCA 385
•25 September 2008
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EMBARGOED FROM RELEASE OTHER THAN TO PARTIES, THEIR EMPLOYEES AND COUNSEL FOR 3 HOURS AFTER DELIVERY
IN THE COURT OF APPEAL OF NEW ZEALAND
CA154/07
[2008] NZCA 385BETWEENLAB TESTS AUCKLAND LIMITED
Appellant
ANDAUCKLAND DISTRICT HEALTH BOARD, WAITEMATA DISTRICT HEALTH BOARD AND COUNTIES MANUKAU DISTRICT HEALTH BOARD
First RespondentsANDDIAGNOSTIC MEDLAB LIMITED
Second RespondentANDHARBOUR PRIMARY HEALTH ORGANISATION
Third Respondent
Hearing:5 to 8 May 2008 and 12 to 14 May 2008
Court:Hammond, Arnold and Ellen France JJ
Counsel:G P Curry and S S Cook for Appellant
G M Illingworth QC, C P Browne and A J B Holmes for First Respondents
J E Hodder, A S Ross and M A Wisker for Second Respondents
B Gray QC and H Janes for Third Respondent
Judgment:25 September 2008 at 11.30 am
JUDGMENT OF THE COURT
A The appeal is allowed.
B The following orders of the High Court are quashed:
(a)The ARDHBs’ decision to award a contract for laboratory services for the Auckland region to Lab Tests was ultra vires and invalid and of no effect; and
(b)The contract entered into between the ARDHBs and Lab Tests for the provisions of primary referred pathology services on 14 July 2006 is invalid and of no effect.
CLeave is reserved to the appellant and the first respondent to seek consequential orders if required.
DThe second respondent must pay each of the appellant and the first respondent costs of $48,000 plus usual disbursements. We certify for two counsel.
REASONS
Arnold and Ellen France JJ [1]
Hammond J [348]ARNOLD AND ELLEN FRANCE JJ
(Given by Arnold J)
Table of Contents
Para No.
Introduction [1]
DML’s claim [10]
High Court decision [13]
Issues on appeal [17]
Standard of procedural fairness: scope of judicial review [19]
The issue [19]
High Court [24]Summary of submissions [27]
The principal authorities [36]
Application to this case [61]
Our evaluation [85]
Conflict of interest [95]
The issue [95]
Statutory provisions [97]
Factual background [108](i)Conflicts faced Dr Bierre [110]
(a) The boutique laboratory [111]
(b) RFP 577 [153](ii)Dr Bierre’s interest disclosure, and ADHB’s management
of it [160]
High Court [169]
Submissions [172]
Our evaluation [173]
Conclusion [193]
Misuse of inside information [196]
The issue [196]
Statutory setting [197]
High Court [199]
Our evaluation [207](i) Desire for open book accounting [217]
(ii)Perception that DML earning super profits and resistant
to change [239]
(iii) Desired level of savings [244]
(iii)Willingness to contemplate radical change to achieve
savings [259]
Conclusion [284]
Consultation [286]
The issue [286]
High Court [287]
Statutory and documentary framework [296]
Our evaluation [311]
Conclusion [332]
Supporting judgment on other grounds [334]
Concluding comments [342]
Decision [345]
Introduction
[1] In February 2006, after several years of preparatory work, the three first respondents, the Auckland region District Health Boards (the ARDHBs), issued a request for proposals for the provision of community laboratory services in the Auckland region (RFP 577).
[2] Community laboratory services involve the collection and analysis of blood and other samples for diagnostic purposes. Approved referrers (typically, general practitioners (GPs) but also other health professionals) refer their patients to community laboratories for the taking of samples, particularly blood samples. Blood samples are taken by technicians (phlebotomists) at a variety of collection centres throughout the Auckland region, transported to central facilities for analysis and, if necessary, diagnosis by pathologists. The results are then provided to the referring GPs. Obviously such testing is an important diagnostic tool and GPs place a high value on the accuracy and responsiveness of those carrying out the testing.
[3] The purchase of services such as these by District Health Boards (DHBs) falls under s 25(2) of the New Zealand Public Health and Disability Act 2000 (NZPHD Act). That section empowers a DHB to negotiate and enter into a contract for the provision of services “if permitted to do so by its annual plan and in accordance with that plan”.
[4] RFP 577 contemplated an arrangement under which the successful tenderer would provide community laboratory services on behalf of the ARDHBs over a five-year period (with two rights of renewal of three and two years respectively). There were two tenderers – the appellant, Lab Tests Auckland Limited (Lab Tests), and the second respondent, Diagnostic Medlab Limited (DML). The majority ownership interest in Lab Tests was held by an Australian public company, Healthscope Ltd, through two subsidiaries, Gribbles NZ Ltd and Gribbles Group Pty Ltd (Gribbles). Healthscope provides pathology services in Australia and also operates laboratories in Singapore and Malaysia. DML is wholly owned (ultimately) by Sonic Healthcare Pty Ltd (Sonic), also an Australian public company with interests in hospitals and laboratories in Australia.
[5] DML was the incumbent provider. It had a reputation for having provided a high quality and responsive service over a number of years. Lab Tests was a new enterprise. Dr Tony Bierre, a pathologist and elected member of the Auckland District Health Board (ADHB), had an ownership interest in Lab Tests. He had been involved in some of the preparatory work which ultimately lead to RFP 577.
[6] The ARDHBs set up an evaluation panel consisting of five ARDHB personnel and two independent consultants, assisted by several advisors, to consider the proposals. After Lab Tests and DML had made their initial proposals in early April 2006, each had discussions with the panel. There was then an opportunity for the parties to refine or amend their proposals, which each took. On the basis of those further proposals, Lab Tests was selected as the first preferred bidder and DML as the second. There were then discussions between Lab Tests and the ARDHBs. While these were going on, DML submitted a further proposal, which the evaluation panel refused to consider. Shortly after, the ARDHBs and Lab Tests agreed a contract, which they executed on 14 July 2006. Under the contract, Lab Tests was to take over the provision of community laboratory services from DML on 1 July 2007.
[7] When this result became known, DML applied for judicial review of the ARDHBs decision to award the contract to Lab Tests. Broadly, DML alleged that the decision was procedurally flawed, as a result of Dr Bierre’s involvement (because he had inside information and a conflict of interest) and by reason of other procedural failings including the failure to consult. DML argued that the decision was ultra vires and in any event irrational. The third respondent, Harbour Primary Health Organisation (HPHO), was given leave to intervene to make submissions on the issue of consultation: HC AK CIV-2006-404-4724 18 October 2006. (We will refer to the regional Primary Health Organisations collectively as the PHOs.)
[8] DML succeeded in the High Court before Asher J: HC AK CIV 2006-404-4724 20 March 2007 (reported in part at [2007] 2 NZLR 832). Lab Tests now appeals. Although they appear as respondents, the ARDHBs are effectively appellants. Although they do not wish to take sides in the commercial dispute between DML and Lab Tests, they wish to support Lab Tests’ submissions on the scope of judicial review in this case, and to argue that they met their obligations to the PHOs in respect of consultation. DML has filed a notice supporting the judgment on other grounds.
[9] We will discuss particular aspects of the factual background in more detail in the context of our discussion of the issues on the appeal.
DML’s claim
[10] Having identified the parties, summarised the statutory framework and summarised the background to RFP 577, DML’s amended statement of claim set out the background facts on which its claim for review was based. It dealt with them under four sub-headings – Dr Bierre, ARDHB Laboratories, Transition and Long-term Risks, and Changed Service Model.
[11] In brief, the factual allegations under each head were as follows:
(a)Dr Bierre: The essential allegation was that Dr Bierre was an insider at ADHB who failed to disclose adequately his interest in pursuing a contract for the provision of laboratory services to the ARDHBs. As a result of his position as an insider, Dr Bierre was able to:
(i)Build important personal contacts with key personnel within the ARDHBs;
(ii)Influence their perceptions of DML and the precise details of the services which the ARDHBs wished to purchase;
(iii)Use confidential information obtained as a result of his position to give Lab Tests an unfair advantage over DML.
(b)ARDHB laboratories: Each of the ARDHBs operated its own laboratory. The allegation was that the ARDHB laboratories indicated to DML that they had only a limited capacity to process tests, creating a legitimate expectation that this position would be adopted in respect of all tenderers. However, Dr Bierre was advised that, with relatively minor changes, that capacity could be increased significantly.
(c)Transition and long terms risks: It was alleged that the nature of the laboratory services contract was such that the proposed change of provider on an exact date was fraught with transition risk, and even small errors could cause serious harm to the health of patients. Further, there was a long term risk in relation to the level of service that would be provided, given the significantly lower price offered by Lab Tests.
(d)Changed service model: If the ARDHBs were prepared to accept a drastically lower level of service (with a reduction in pathologist and collection service staff numbers as well as a move to greater collection of samples by GPs (GP collect), longer turn-around times and a different transportation process), DML should have been given the opportunity to bid on that basis. The ARDHBs were required to consult with the relevant affected parties about any material changes that they proposed and they failed to do so.
[12] The amended statement of claim then set out the basis for DML’s claim. We reproduce this section in full:
66In receiving and considering a bid from Lab Tests, despite Dr Bierre’s involvement in the RFP’s design (and in laboratory strategies more broadly) purportedly as a board member, the ARDHBs:
66.1favoured the interests of one party to the RFP 577 process by allowing Dr Bierre to use (or appear to use) information, contacts and relationships gained as a board member for the purpose of obtaining a personal benefit, and thus failed to act fairly and in good faith; and
66.2demonstrated bias, the appearance of bias against DML and/or in favour of Lab Tests, and/or predetermination in the RFP 577 process by:
(a)failing appropriately to manage a conflict of interest;
(b)pursuing a process devised or influenced by an interested party; and/or
(c)allowing Dr Bierre and Lab Tests to obtain an improper advantage, or to appear to obtain an improper advantage, in RFP 577.
67The ARDHBs acted contrary to DML’s legitimate expectations that:
67.1the quality and level of service sought under RFP 577 was the status quo;
67.2the RFP process would be conducted fairly and consistently with terms of the RFP documents.
68In their approach to the Decision the ARDHBs acted irrationally and/or arbitrarily in that they:
68.1failed to make proper enquiries, …
68.2determined that the mandatory criteria were satisfied and that Lab Tests was capable of delivering the service from 1 July 2007;
68.3relied on material mistakes of fact, particularly:
(a)that the same quality of service, could be operational within a year;
(b)that the same quality of service as currently provided could be provided for Lab Tests’ price;
(c)that due diligence had been undertaken on the international capabilities of Healthscope, such that the ARDHBs could reasonably be assured that Lab Tests had met the mandatory criterion of capability and viability and that any transition risks were manageable;
(d)that ADHB and Dr Bierre had addressed any conflicts by an approach that exceeded all statutory or ethical obligations;
(e)that other participants had access to more specific information and understandings as to ARDHBs’ strategies from Dr Bierre;
(f)that the contract with Lab Tests could not be brought to an end by Lab Tests before July 2011; and thus
68.4failed to take into account relevant considerations and/or took into account irrelevant considerations.
69In deciding to purchase the Changed Service Model from Lab Tests, the ARDHBs:
69.1did not consult with any of the parties identified at paragraph 65 above and thus:
(a)unlawfully failed to comply with their obligations [to consult specified affected parties]; and
(b)unlawfully and in breach of natural justice failed to consult with relevant interested parties; and
69.2failed to satisfy themselves as to the feasibility, adequacy and quality of the Changed Service Model and its ability to meet the healthcare needs of the wider communities within their respective regions; and
69.3failed to give DML the opportunity to bid for the Changed Service Model on the same footing as any other bidder; and thus
69.4failed to act reasonably and in the public interest.
70Neither the Lab Tests contract itself, nor the changes to the nature, scope and quality of the community-referred pathology service pleaded herein, were permitted by, nor consistent with, any of the ARDHBs’ Annual Plans, and is as a result ultra vires and of no effect.
71The individual and cumulative effects of the matters pleaded at paragraphs 66 to 69 above, when considered against the background of the significance of the Decision for the population of Auckland, general practitioners and other health professionals, the ARDHBs’ own laboratory services, and for DML render the Decision unlawful.
72The Lab Tests Contract is invalid and of no effect.
73By reason of matters referred to in paragraphs 66 to 69 above, the Decision is contrary to law and should be quashed.
High Court decision
[13] Asher J heard the case over ten hearing days. As the Judge noted (at [5]), some 68 affidavits were filed and almost 12,000 pages of documents were produced. (By agreement, there was no cross-examination, although cross-examination is not permitted as of right in judicial review cases in any event: see, for example, Wilson v White [2005] 1 NZLR 189 at [15] – [28] (CA).) In addition to this evidentiary material, there were the parties’ written submissions, which ran to more than 700 pages in the High Court. The Judge said that he was not critical of the quantity of material, given the number of parties involved and the importance and complexity of the issues.
[14] For our part, we consider that the scope of the affidavits could and should have been reduced. Some of the material in them is more in the nature of argument or submission than evidence, and some, while in the nature of evidence, is of doubtful relevance in a judicial review context.
[15] We do not propose to summarise the High Court judgment in detail at this stage. Again, we think that can better be done in the context of our discussion of particular issues. It is sufficient to say at this point that the Judge dismissed the allegations of bias, breach of legitimate expectation and irrationality. He also rejected the claims that the ARDHBs had failed to satisfy themselves as to the adequacy of the changed services model and to act reasonably and in the public interest. However, the Judge found that Dr Bierre’s ability to use confidential information had disadvantaged DML in its bid. He was satisfied that although there had not been bias in the orthodox sense, Dr Bierre should not have participated in the Lab Tests proposal given his prior involvement with the ADHB. He also upheld the claim that there had been a failure to consult, but only in respect of the PHOs, not in respect of DML. Accordingly, the Judge held that the contract was not permitted by or consistent with the ARDHBs’ annual plans and was therefore ultra vires.
[16] The result was that the RFP process would have to be undertaken again, with the DML contract continuing in the meantime.
Issues on appeal
[17] As we have said, Lab Tests has appealed against Asher J’s decision, and DML seeks to support the judgment on other grounds. As a result, everything at issue before the Judge is at issue before us.
[18] We summarise the issues as follows:
(a)Whether the standard of procedural fairness applied by the Judge was too high. This raises the issue of the proper scope of judicial review in a case such as this.
(b)Whether Dr Bierre had a conflict of interest in relation to RFP 577 and, if so, whether the ARDHBs appropriately managed that conflict.
(c)Whether Dr Bierre had confidential or inside information and, if so, whether he took improper advantage of that information.
(d)Whether the ARDHBs had a duty to consult the PHOs and, if so, whether they breached that duty.
(e)Whether the grounds relied on by DML in its notice supporting the judgment on other grounds support the Judge’s decision.
Standard of procedural fairness: scope of judicial review
The issue
[19] The government sector in New Zealand, as in other jurisdictions, has undergone profound change over the last 20 years. This period of change was characterised by the corporatisation, and in some cases the privatisation, of many state trading functions, accompanied by extensive deregulation and economic liberalisation, and by decentralisation. The early background is summarised in Duncan & Bollard Corporatization and Privatization: Lessons from New Zealand (1992) in Chapter 1. They say that about 30 central government organisations were transformed into state-owned enterprises (SOEs). (More recent figures are found in Chen “Changing Shape of the Public Sector” [2001] NZLJ 201 at 202.) In addition, local body organisations were corporatised and in some instances privatised. The premise underlying corporatisation was that the efficiency of state trading activities would be improved by emulating a private sector model.
[20] This period of change also saw the increased use of contracting within the public sector (for a useful discussion of the issues arising from the move towards contracting see the various essays in Boston (ed) The State Under Contract (1995)). For present purposes there are two important elements to this. First, there has been increasing use of broadly stated performance agreements, both to provide specific objectives for the enterprises to which they relate but also to allow for performance assessment and to facilitate accountability. Statements of corporate intent under s 14 of the State-Owned Enterprises Act 1986 (SOE Act), agreed between the boards of SOEs and the relevant Ministers, are one example. Second, state agencies have been encouraged to consider whether they should “make” or “buy” particular services (that is, whether they should provide services themselves or contract with the private sector for their provision). By this means the private sector has increasingly performed work previously performed directly by the public sector.
[21] The health sector has been significantly affected by these changes. The Health and Disability Services Act 1993 (the HDS Act) incorporated much of the thinking that underpinned the changes summarised above. Initially, Crown Health Enterprises (CHEs) were obliged to provide health services consistently with their statements of intent and any other relevant agreements “while operating as a successful and efficient business” (s 11(1) of the HDS Act). Like SOEs, they were obliged to exhibit a sense of social responsibility, to uphold relevant ethical standards, to be good employers and “to be as successful and efficient as comparable businesses that are not owned by the Crown” (s 11(2)(d)). The current Act, the NZPHD Act, represents something of a retreat from that model, a point on which Mr Hodder for DML placed considerable emphasis. We return to it below.
[22] The changes to the public sector over the last 20 years have presented a considerable challenge to the courts, and in particular to their approach to judicial review (see, for example, de Smith’s Judicial Review (6ed 2007) at [3-059]). The particular question that has arisen concerns the extent to which judicial review should apply to decision-making within the new structures or models. Some commentators suggested that there would be a reduced role for judicial review in the new environment: see Taggart “Corporatisation, privatisation and public law” (1991) 2 PLR 77. As will become apparent in the discussion which follows, the courts have not yet finally grappled with the full implications of the changes in the context of judicial review.
[23] At issue in the present case is the ARDHBs’ power to enter a contract under s 25(2)(a) of the NZPHD Act. No party disputed that a DHB’s decision under s 25 to enter a contract was, in principle, subject to judicial review. Rather, the dispute concerned the scope of review.
High Court
[24] As to the scope of review, Asher J said:
[11] It has been clear since Webster v Auckland Harbour Board [1983] NZLR 646 (CA) that the exercise of contractual powers by public authorities is open to review on public law grounds in an appropriate case. This approach has since been confirmed in Royal Australasian College of Surgeons v Phipps [1999] 3 NZLR 1 (CA).
[12] Whether a contractual power exercised by a [CHE] (the commercially oriented predecessor to DHBs) was susceptible to judicial review was considered in Southern Community Laboratories Ltd v Healthcare Otago Ltd [HC DUN CP30/96 19 December 1996]. Eichelbaum CJ concluded at p 17 that the statement of claim was an attempt to incorporate administrative law concepts into a commercial decision-making process, and that the issues were not justiciable. He struck out the statement of claim.
[13] The defendants have not sought to rely on Southern Community Laboratories to argue that the decision in these proceedings is not susceptible to judicial review. The Southern Community Laboratories decision was made in the context of the [HDS Act], which expressly brought a commercial edge to public health. Section 11(2)(d) of that Act provided that [CHEs] should be as successful and efficient as comparable businesses that are not owned by the Crown. That legislation, and with it the emphasis on efficiency and profitability, was swept away by the [NZPHD] Act. There is no reference in the new Act to the new DHBs being comparable to businesses. The primary focus for DHBs under the [NZPHD] Act is now the improvement of the health of the New Zealand public.
[14] The commercial context present in Southern Community Laboratories has gone, and the DHBs’ power to enter into contracts with service providers should be subject to judicial review. DHBs are clearly public bodies. DHBs’ ability to enter into contracts with major service providers goes to the heart of their statutory duty to protect and improve public health.
[25] The Judge accepted that standards of procedural fairness vary with the nature of the power exercised (at [51]). But the importance of the decision to the Auckland public, together with the statutory provisions concerning conflicts of interest, the use of inside information and the obligations of DHB members, indicated that “the legislature expects more than minimal or cursory standards of procedural fairness, although obviously the standard expected of judicial or quasi-judicial decision-makers is not required” (at [56]).
[26] Later, when dealing with conflict of interest, the Judge acknowledged that the statutory provisions applying to DHBs in relation to conflicts were less rigorous than those applying to other Crown entities (at [131]), but he went on to say that the concept of conflict of interest in administrative law was not constrained by them. As a consequence, a DHB could deal with a conflict of interest in accordance with the statutory provisions, but that conflict could still, for administrative law purposes, be impermissible “if it amounts to procedural unfairness or impropriety” (at [134]). The Judge said that the ARDHBs had a public law duty “to conduct public affairs with probity” (at [160]). Then, when addressing the statutory provisions dealing with the use of inside information, the Judge said that the ADHB could not have exercised its power to authorise the use of inside information in this context. This was because to have done so would have been to damage the integrity of its processes by giving one party an unfair advantage over another, thereby jeopardising its chances of reaching the best decision (at [225]).
Summary of submissions
[27] The submissions made by Mr Curry for Lab Tests and Mr Illingworth QC for the ARDHBs on this issue were essentially the same. For convenience we deal with them together.
[28] They argued that there is a sliding scale of reviewability. The highest standards are reserved for those exercising adjudicative-type functions having a significant impact on individuals. Where the decision is “commercial”, the requirements of procedural justice are less stringent, particularly where a competitive tender process is involved. Mr Curry and Mr Illingworth relied in particular on the decisions of the Privy Council in Mercury Energy Ltd v Electricity Corporation of New Zealand Ltd [1994] 2 NZLR 385 and Pratt Contractors Ltd v Transit New Zealand [2005] 2 NZLR 433, to which we return below.
[29] In relation to the Judge’s treatment of Eichelbaum CJ’s decision in Southern Community Laboratories, they accepted that the statutory context had changed but said that the NZPHD Act still required the ARDHBs to act commercially. Reliance was also placed on New Zealand Private Hospitals Association – Auckland Branch (Inc) v Northern Regional Health Authority HC AK CP440/94 7 December 1994, where Blanchard J said (at 42):
Here the [HDS Act] has conferred upon regional health authorities the function of making purchase agreements for health services and disability services. To carry out this function it will be necessary for a regional health authority to enter into many such contracts and, similarly, to make decisions about terminating or changing contractual relationships. It would be quite intolerable if, in addition to rules of contract law and other principles of the general law (including equity), a statutory body of this type, which is after all exercising a trading function, should also be subject to judicial review, including particularly an obligation to observe the principles of natural justice. Any trading organisation subjected to that requirement would be at a distinct competitive disadvantage. I doubt very much that those who framed the health reforms would have intended that to be so.
[30] Mr Curry and Mr Illingworth submitted that the Judge in the present case had adopted far too high a standard, one more fitting to a body exercising a judicial or quasi-judicial function. While accepting that not all decisions made by DHBs were properly characterised as “commercial”, the decision in the present case was, they said, purely commercial – to enter into a contract with a private sector provider for certain services on the best terms achievable.
[31] They said that the Judge had failed to pay sufficient regard to the legislative framework as a whole. They emphasised in particular that the ARDHBs are required to:
(a)Endeavour to recover all their annual costs (including the cost of capital) from their net annual income (s 41 of the NZPHD Act);
(b)Prudently manage their assets (s 51(a) of the Crown Entities Act 2004 (CEA)); and
(c)Endeavour to ensure their long-term financial viability and that they act as successful going concerns (s 51(b)(i) and (ii) of the CEA).
Accordingly, they submitted, although the ARDHBs are not required to make a profit (as CHEs were for a period), they must still act commercially, and must be able to do so on the same footing as other parties. To hold the ARDHBs to the high standard imposed by the Judge would be to handicap them in their dealings with private sector firms, which were free to adopt a wholly commercial approach.
[32] Further, they submitted that the power of DHBs to contract for the provision of services under s 25 of the NZPHD Act is in similar terms to the power that health funders had under the HDS Act to enter service contracts (s 22 of the HDS Act). This indicated that the legislature did not envisage a change of approach in this respect.
[33] For his part, Mr Hodder for DML emphasised that fundamental to its position were “those aspects of the rule of law which require public decisions to be made with integrity and in the public interest.” He pointed out that the NZPHD Act was a break from the model reflected in the HDS Act. In particular, the previous “commercial” aspects of the public health and disability sector were removed, in favour of a greater recognition of public service obligations by DHBs to their populations and of increased public participation. Mr Hodder noted that DHBs were stated to be “statutory entities rather than companies” (s 5(3)(d) of the NZPHD Act).
[34] Mr Hodder accepted that the NZPHD Act encouraged DHBs to obtain the best value for money but said that there was nothing in the High Court’s judgment to prevent them from doing so. What the judgment sought to enforce was probity in public decision-making, which was fundamental to open and honest government. Mr Hodder said that this case was about “the Court’s obligation to ensure minimum standards of hygiene in public administration, whether or not the decision is ‘commercial’”. He said that the principle was that “a s 25 decision is reviewable if it is tainted by a serious lack of integrity, i.e., fraud, corruption, bad faith or any other material departure from accepted public sector ethical standards which requires judicial intervention.” He described this as “even-handedness in some sense”.
[35] Against this background we turn to a discussion of the authorities.
The principal authorities
[36] In Royal Australasian College of Surgeons v Phipps [1999] 3 NZLR 1 this Court considered whether judicial review was available in respect of the report of a panel appointed by the Royal Australasian College of Surgeons to review the work of a surgeon who was not a member of the College. The Court held that the report was reviewable under the extended definitions in s 3 of the Judicature Amendment Act 1972, as amended in 1977.
[37] In its judgment, the Court noted that “[o]ver recent decades Courts have increasingly been willing to review exercises of power which in substance are public or have important public consequences, however their origins and the persons or bodies exercising them might be characterised” (at 11). The Court went on to say (at 12):
The Courts have made it clear that in appropriate situations, even although there may be no statutory power of decision or the power may in significant measure be contractual, they are willing to review the exercise of the power including review for breaches of natural justice, …
While the historical development suggests a liberal approach to the availability of review proceedings, the powers of the Court are not, of course, at large. They must be rooted in principle and in the texts of the relevant statutes and rules.
[38] The factual situation in that case is, of course, far removed from the present. But the principles articulated are relevant.
[39] One of the authorities cited by the Court in Royal Australasian College of Surgeons was the decision of the Privy Council in Mercury Energy. Mercury was party to a transitional contractual arrangement with a SOE, Electricity Corporation of New Zealand (ECNZ), for the supply of electricity, pending negotiation of a long-term supply agreement. When after some years the parties had not reached agreement, ECNZ gave Mercury 12 months notice of its intention to cancel the transitional contract. Mercury sued, alleging breach of contract, breach of statutory duty and abuse of monopoly power (at common law). In addition, Mercury sought judicial review of the decision to terminate.
[40] In this Court, the application for judicial review was struck out (along with other claims), on the basis that ECNZ’s decision to terminate was not amenable to judicial review: Auckland Electric Power Board v Electricity Corporation of New Zealand Ltd [1994] 1 NZLR 551 at 560 - 561. On appeal, the Privy Council rejected that view. Delivering their Lordships’ advice, Lord Templeman accepted that the decisions of SOEs were in principle amenable to judicial review. His Lordship emphasised the public character of SOEs (in terms of ownership and responsibilities) and noted that the decisions of SOEs might adversely effect the rights and liabilities of private individuals without affording them any redress (at 388).
[41] However, Lord Templeman then said (at 391):
It does not seem likely that a decision by a [SOE] to enter into or determine a commercial contract to supply goods or services will ever be the subject of judicial review in the absence of fraud, corruption or bad faith.
And went on to say:
Industrial disputes over prices and other related matters can only be solved by industry or by government interference and not by judicial interference in the absence of a breach of the law.
[42] His Lordship concluded by saying:
The causes of action based on breach of statutory duty, abuse of a monopoly position and administrative impropriety are only relevant if the causes of action based on contract are rejected. If the causes of action based on contract are rejected, the other causes of action will only constitute attempts to obtain, by the declaration sought, specific performance of a non-existing contract. The exploitation and extension of remedies such as judicial review beyond their proper sphere should not be encouraged.
[43] Almost as soon as this decision was delivered, it attracted vigorous criticism, especially from Professor Taggart (see Taggart “Corporatisation, contracting and the courts” [1994] Public Law 351). Professor Taggart argued that there was an inconsistency between the reasons for their Lordships’ acceptance of the availability of review and their subsequent limitation of the scope of review to the narrow set of circumstances envisaged by the words “fraud, corruption or bad faith” (at 357). He speculated that the Privy Council’s decision reflected “a persistent feature of even modern British administrative law to immunise contractual matters from judicial review” (at 358).
[44] Recent English authorities indicate a continuing ambivalence in relation to judicial review and contracting by public bodies, although European Community directives and recent legislative changes have significantly impacted the legal landscape (see the discussion in R (on the application of the Law Society) v Legal Services Commission [2008] 2 WLR 803 (CA)).
[45] Writing in 2005, Professor Arrowsmith noted a conflict in the English cases as to whether judicial review was available in respect of contracting decisions by public bodies in the absence of bad faith (see Arrowsmith The Law of Public and Utilities Procurement (2005) at 79 – 85). The orthodox view is that, absent fraud, judicial review will not be available simply because a public body has made a contracting decision. There must be something more to give the decision a “public” element, such as a “statutory underpinning” which requires the body to negotiate in a particular way or with particular terms (see, for example, R v The Lord Chancellor ex parte Hibbit and Sanders (1993) The Times 12 March 1993 (QB), per Rose LJ at 5 and Waller J at 7). Professor Bailey in “Judicial Review of Contracting Decisions” [2007] Public Law 444 illustrated the broader view by reference to R (on the application of Molinaro) v Kensington & Chelsea RLBC [2002] LGR 336 (QB), where Elias J said:
[67] … [P]ublic bodies are different to private bodies in a major respect. Their powers are given to them to be exercised in the public interest, and the public has an interest in ensuring that the powers are not abused. I see no reason in logic or principle why the power to contract should be treated differently to any other power. It is one that increasingly enables a public body very significantly to affect the lives of individuals, commercial organisations and their employees.
Professor Bailey supported the Elias J’s approach but noted that it was not clear that it represented the law in England (at 451), a doubt shared by de Smith (at [3‑060] - [3‑061]). Indeed, in another note (“Judicial Review and the Tendering Process” [2007] PPLR 11), Professor Bailey said that the question of the amenability of public bodies exercising contracting powers to judicial review in England was “in urgent need of clarification” (at 20).
[46] Returning to Mercury Energy, it must be remembered that the SOE Act is a short, generally worded statute and that SOEs are state trading enterprises incorporated under the companies legislation, expected in large measure to emulate the performance of non-Crown owned businesses. Further, the dispute in that case was essentially about price - how much Mercury should pay ECNZ for electricity. The present context is different, however, because of the nature of DHBs, the more detailed and specific statutory context, and the nature of the dispute. We return to these features below.
[47] In Pratt Contractors there was a claim in contract arising out of a tender process conducted by Transit New Zealand, a Crown entity constituted by the Transit New Zealand Act 1989. The Act imposed an obligation on Transit to approve and follow “competitive pricing procedures” in funding highway construction and maintenance work. These were contained in a competitive pricing procedures manual known as the CPP.
[48] Pratt Contractors tendered for certain highway realignment work. Its tenders were unsuccessful. It sued Transit on the basis of a process contract and for breach of the Fair Trading Act 1986. It alleged that the request for tenders (RFT) contained express and implied terms as to the method by which Transit would select the successful bidder and that Transit had breached these terms. Transit generally accepted the legal framework postulated by Pratt Contractors, and in particular that it was obliged to evaluate and administer tenders fairly and equally, but argued that it had met its obligations.
[49] At trial Goddard J found in favour of Pratt Contractors: HC WN CP221/97 6 September 2000. She held that Transit was required by a process contract to comply with the CPP and other internal manuals, and it had failed to do so. In particular, Goddard J found that Transit was in breach of an implied obligation to deal fairly and in good faith with Pratt Contractors because there was a real risk of bias against the company as a result of an earlier dispute involving the company and Transit’s consultants on the current tender.
[50] In the Court of Appeal ([2002] 2 NZLR 313), McGrath J, writing for the Court, accepted that Transit and Pratt Contractors had entered into a process contract based on the RFT and the documents it incorporated (at [80]). This arose not simply from the terms of the RFT but also from the statutory context (at [78] – [79]). The Court also accepted that Transit had an implied contractual duty to treat tenderers equally in the performance of its contractual obligations (at [86]). Having referred to Finn J’s judgment in Hughes Aircraft Systems International v Airservices Australia (1997) 146 ALR 1 (FCA), and considered the operating model that Parliament envisaged for Transit, MrGrath J said that the implied duty of even-handedness should not be expanded by the implication of further obligations, unless they met the tests for the implication of contractual terms (at [91] – [92]).
[51] In relation to public law standards, McGrath J noted that it was inevitable within a small market that those involved in assessing tenders would have settled views, based on prior knowledge, about particular tenderers (at [97]). As long as this did not inhibit the exercise of genuine judgment, the existence of such views was desirable. The Judge also said that there was a danger in judicial scrutiny of judgments in this area “if the Court applies standards akin to those required in judicial review proceedings involving the exercise of statutory powers” (at [98]). He said (at [98]):
We do not consider there is a contractual obligation on Transit to avoid conducting its evaluation in a way which would leave a statutory officer open to judicial review for apparent bias. It is only such conduct as demonstrates there was actual unfair dealing in the application of its contractual obligations which can amount to a breach of contract.
[52] In the Privy Council Lord Hoffmann, delivering their Lordships’ advice, said:
[3] At the centre of the dispute lies the question of the extent to which the procedure for competitive tendering should be judicialised. Tenderers naturally want to be judged independently on their merits by an impartial selector and given the opportunity to rebut any suggestions of demerit which they regard as unfair. The parties who invite tenders, even if they are public authorities like Transit, want to be able to choose in what they consider to be their best commercial interests and not be hobbled by quasi-judicial procedural rules.
[53] Lord Hoffmann went on to agree with Finn J’s dictum in Hughes Aircraft Systems International (at 42) that an implied duty of good faith and fair dealing (at [46]):
… does not as such impose on [the employer] under the guise of contract law, the obligation to avoid making its decision or otherwise conducting itself in ways which would render it amenable to judicial review of administrative action.
(Emphasis in original.)
His Lordship said that the duty of good faith and fair dealing required Transit to treat the tenderers equally (in the sense of judging them by the same criteria). But it did not mean that the evaluators could not come to the process with previously formed views about the merits of contractors, nor did they have to act judicially (at [47]).
[54] The statute at issue in Pratt Contractors was more akin to the NZPHD Act than the SOE Act, in that it was more detailed and specific. The decision of the Privy Council nevertheless indicates that the standard of procedural fairness required of a public body acting in a commercial context is not the same as that required of administrative decision-makers. It is clear from the decision that Transit was required to be open to the receipt of information from and about tenderers and to evaluate tenderers equally and honestly against the relevant criteria. But it was not required to act judicially, nor was it bound by the rules against bias that would apply to those acting judicially.
[55] For present purposes, we see the following points derived from the authorities as relevant.
[56] First, where a public body is involved in a commercial process, in this case seeking tenders and awarding a contract, that body must exercise its contracting power in accordance with its empowering statute, if there is one. Here the ARDHBs must (at least) comply with the requirements of s 25. If they do not, their contracting decision is susceptible to judicial review on the ground of illegality. None of the parties before us disputed this.
[57] Second, the procedural obligations of a body performing a public function will vary with context. So, a public body exercising a particular statutory power may be bound by natural justice obligations, but such obligations may have less, or even no, relevance to the same body when making another type of decision under statute.
[58] Third, “context” for these purposes includes the nature of the decision being made, the nature of the body making the decision and the statutory setting within which the decision is made. In the present case, the statutory provisions dealing with confidential information and conflict of interest assume critical importance.
[59] Fourth, the Privy Council’s decision in Mercury Energy indicates that the courts will intervene by way of judicial review in relation to contracting decisions made by public bodies in a commercial context in limited circumstances, although that is subject to the point about context just made. Generally other accountability mechanisms (such as ministerial control and parliamentary oversight) are likely to be seen as more appropriate. Mercury Energy has been cited and applied in England as well as in New Zealand (see, for example, Menai Collect Limited v Department for Constitutional Affairs [2006] EWHC 727 (Admin) (QB) and R (on the application of Gamesa Energy UK Limited) v National Assembly for Wales [2006] EWHC 2167 (Admin) (QB)).
[60] The decision in Pratt Contractors provides further support for this approach, even though there was no public law cause of action in that case. The Privy Council’s unwillingness to import public law notions into the contractual framework suggests that their Lordships saw the contractual framework as sufficient in itself. As we have already said, it is significant that the contracting decision in that case was made in the context of a more detailed and specific statutory setting than is found in relation to SOEs. But the statutory requirement for a competitive commercial approach towards tendering led to the conclusion that the implied duties were limited and would not be supplemented by means of a public law analysis. Furthermore, their Lordships were unwilling to impose process requirements on Transit (in relation to bias) which were inconsistent with the use of an appropriate evaluation methodology (i.e., an evaluation team involving persons knowledgeable in the industry, who, because of their knowledge and experience, were likely to have views about tenderers).
Application to this case
[61] In the period from 1993 until 30 June 1998, CHEs were required to operate as successful and efficient businesses (s 11(1) of the HDS Act). While they were required to exercise a sense of social responsibility by having regard to the interests of the community they served, they were also required to be as “successful and efficient as comparable businesses that are not owned by the Crown” (s 11(2)(d)). From 1998, when Hospital and Health Services (HHSs) took over from CHEs, HHSs had to operate in a businesslike and effective manner, but on a not-for-profit basis (s 11(2) of the HDS Act). Section 11(4) provided that a HHS “operates on a not-for-profit basis if its annual net income covers all its annual costs (including the cost of capital)”. So the “competitive” model of the HDS Act as originally enacted was watered down by the 1998 amendments.
[62] The NZPHD Act (and the DHB structure) took effect from 1 January 2001. Whereas previously the Health Funding Authority, a national body, had purchased services such as community laboratory services for individual hospital regions, under the NZPHD Act that task fell to DHBs.
[63] While the NZPHD Act did effect something of a sea change in the management of public health services when compared to the HDS Act (certainly as originally enacted), it did not sweep away all elements of the former Act. Although the NZPHD Act emphasised the public service aspect of the provision of health services, it did not remove the commercial aspect altogether. Under the NZPHD Act the DHBs are still required to make commercial decisions, and in respect of those decisions the authorities support a relatively limited role for judicial review, subject always to the statutory context. We develop these points below.
[64] Section 21 of the NZPHD Act provides that DHBs are crown entities, governed by the CEA, except to the extent that the NZPHD Act expressly provides otherwise. Under the CEA, crown entities are grouped into five categories (s 7(1)). DHBs fall within the category “statutory entities” (s 7(1)(a)). Within that category, they are Crown agents, which must give effect to Government policy when directed by the responsible minister (s 7(1)(a) and Schedule 1, Part 1).
[65] The CEA contains a number of relevant generic provisions. Sections 14 and 15 describe the functions and status of statutory entities. For present purposes, the important functions are those set out in the entity’s Act and any functions incidental to, or consequential on, those functions (s 14(1)(a) and (c)). Under s 14(2) a statutory entity must act consistently with its objectives in performing its functions. Under s 16 a statutory entity may do anything authorised by the entity’s Act or by the CEA, and under s 17 it may do anything that a person of full age and capacity may do, but in each case it must act only for the purpose of fulfilling its functions (s 18).
[66] Sections 19 to 24 of the CEA deal with the validity of acts by statutory entities. Section 19 provides:
19Acts in breach of statute are invalid
(1)An act of a statutory entity is invalid, unless section 20 applies, if it is–
(a)an act that is contrary to, or outside the authority of, an Act; or
(b)an act that is done otherwise than for the purpose of performing its functions.
(2)Subsection (1) does not limit any discretion of a court to grant relief in respect of a minor or technical breach.
[67] Section 20 provides that, despite s 19 “or any rule of law to similar effect”, a person dealing with an entity who does not have actual or constructive knowledge of the matters referred to in s 19(1)(a) and (b) may enforce certain transactions, although that does not limit the availability of judicial review (s 21(d)).Section 22 provides that it is “irrelevant to the validity of an act that the act is not, or would not be, in the best interests of the statutory entity.”
[68] The objectives of DHBs are set out in s 22 of the NZPHD Act. As it received some emphasis in argument, we set the section out in full:
22Objectives of DHBs
(1) Every DHB has the following objectives:
(a)to improve, promote, and protect the health of people and communities:
(b)to promote the integration of health services, especially primary and secondary health services:
(c)to promote effective care or support for those in need of personal health services or disability support services:
(d)to promote the inclusion and participation in society and independence of people with disabilities:
(e)to reduce health disparities by improving health outcomes for Maori and other population groups:
(f)to reduce, with a view to eliminating, health outcome disparities between various population groups within New Zealand by developing and implementing, in consultation with the groups concerned, services and programmes designed to raise their health outcomes to those of other New Zealanders:
(g)to exhibit a sense of social responsibility by having regard to the interests of the people to whom it provides, or for whom it arranges the provision of, services:
(h)to foster community participation in health improvement, and in planning for the provision of services and for significant changes to the provision of services:
(i)to uphold the ethical and quality standards commonly expected of providers of services and of public sector organisations:
(j)to exhibit a sense of environmental responsibility by having regard to the environmental implications of its operations:
(k)to be a good employer in accordance with section 118 of the Crown Entities Act 2004.
(2)Each DHB must pursue its objectives in accordance with its district strategic plan, its annual plan, its statement of intent, and any directions or requirements given to it by the Minister under section 33 of this Act or section 103 of the Crown Entities Act 2004, or under section 107 of the Crown Entities Act 2004.
[69] Section 23 sets out the functions that DHBs have for the purpose of pursuing their objectives. The first of those functions is:
(a) to ensure the provision of services for its resident population and for other people as specified in its Crown funding agreement:
There are numerous other functions in addition.
[70] Section 25 authorises DHBs to enter into service agreements. It provides:
25Service agreements
(1)In this Act, service agreement means an agreement under which 1 or more DHBs agree to provide money to a person in return for the person providing services or arranging for the provision of services.
(2)A DHB may, if permitted to do so by its annual plan and in accordance with that plan, –
(a)negotiate and enter into service agreements containing any terms and conditions that may be agreed; and
(b)negotiate and enter into agreements to amend service agreements.
(3)A DHB that has entered into a service agreement must monitor the performance under that agreement of the other parties to that agreement.
[71] Section 27 deals with the duties of the board of a DHB. It provides:
27Duties of board
(1)The board of a DHB must ensure that the DHB acts in a manner consistent with the DHB’s district strategic plan, annual plan, and any directions under section 33 of this Act or section 103 or section 107 of the Crown Entities Act 2004.
(2)The duty in subsection (1)–
(a)applies in addition to the duties of the board in sections 49 to 52 of the Crown Entities Act 2004; and
(b)is a collective duty owed to the Minister for the purposes of section 58 of the Crown Entities Act 2004.
(3)Despite section 60(1) of the Crown Entities Act, a member of a board of a DHB may not apply for a court order under that section.
[72] Sections 41 to 44 of the NZPHD Act deal with the financial responsibilities of DHBs. For present purposes, s 41 is important. It provides:
41DHBs to operate in financially responsible manner
(1)Every DHB must operate in a financially responsible manner and, for this purpose, must -
(a)Repealed
(b)endeavour to cover all of its annual costs (including the cost of capital) from its net annual income; and
(c)Repealed
(d)Repealed.
(2)This section does not limit section 51 of the Crown Entities Act 2004.
[73] Sections 49 to 51 of the CEA deal with the collective duties of boards of crown entities. Of particular importance in this context are ss 50 and 51. Section 50 provides that the board of a statutory entity “must ensure that the statutory entity performs its functions efficiently and effectively and in a manner consistent with the spirit of service to the public.” Section 51 provides:
51Entity must operate in financially responsible manner
The board of a statutory entity must ensure that the entity operates in a financially responsible manner and, for this purpose, that it–(a) prudently manages its assets and liabilities; and
(b) endeavours to ensure–
(i) its long-term financial viability; and
(ii) that it acts as a successful going concern.
[74] Finally we mention s 87 of the NZPHD Act. That provides:
87 Saving of certain transactions
The validity or enforceability of any deed, agreement, right, or obligation entered into, or incurred by, the Crown or a publicly-owned health and disability organisation is not affected by a failure by the Crown or the organisation to comply with –
(a)any provision in sections 3, 4, or 8, or Parts 3 and 4; or
…
(c) any provision of Schedules 3 to 6; or
(d)Any provision in any statement of intent or district strategic plan or annual plan; or
….
[75] At this stage, we make four points.
[76] First, the objectives set out in s 22 of the NZPHD Act, and the functions described in s 23, are social or public welfare-type objectives and functions. They are not explicitly commercial.
[77] Second, despite the point just made, it is clear that DHBs are expected to act commercially at least to some extent or in some contexts. They are obliged to perform their functions “efficiently and effectively”, albeit “in a manner consistent with the spirit of service to the public” (s 50 of the CEA). They must act in a “financially responsible manner” and endeavour to ensure that they act as successful going concerns (s 51 of the CEA). In addition, they must recover all their costs, including the cost of capital (s 41(b) of the NZPHD Act). That is, they must recover a rate of return on capital invested sufficient to meet the opportunity cost of that capital, the opportunity cost being the rate of return that a DBH could earn if it chose another investment with equivalent risk. While, given the statutory history referred to at [61] above, this must be seen as contemplating a not-for-profit approach, it is a commercial measure. We note that the repealed s 41(a), (c) and (d) of the NZPHD Act were in almost identical terms to s 51(a) and (b)(i) and (ii) of the CEA. So the DHBs’ obligation to attempt to recover all of their annual costs from their net annual income, including the cost of capital, does not apply to crown entities governed solely by the CEA’s generic provisions.
[78] Third, s 25(2)(a) and (b) of the NZPHD Act empowers DHBs to “negotiate and enter into” service agreements or amendments to such agreements. That is relevant to the question of what, if any, public law procedural obligations apply to DHBs when acting under s 25. The section does not require the use of a competitive tendering process. In terms of the section, a DHB is free to negotiate with a single potential supplier if it wishes. (As we indicate below (at [149] – [151]), this occurred in the present case when DML’s contract was extended in mid 2005 to run until 30 June 2007.) Consistently with Pratt Contractors, then, care must be taken in identifying what, if any, procedural obligations flow from the section (or the statute as a whole) as opposed to flowing from a particular selection process which a DHB decides to adopt on a particular occasion (e.g., tendering). The existence of the power to negotiate is relevant for another reason as well. The imposition of onerous procedural obligations may unduly fetter the DHBs’ power to negotiate effectively, thus handicapping them in attempting to deal with determined private sector service providers, as Mr Curry and Mr Illingworth argued.
[79] Fourth, s 87 of the NZPHD Act is broader in scope than the corresponding provisions in the CEA (ss 19 – 24). It is not entirely clear what the interrelationship is between the two sets of provisions. Section 21(2) of the NZPHD Act provides that the CEA applies to DHBs except to the extent that the NZPHD Act expressly provides otherwise. Section 21(3) then identifies the sections in the CEA that do not apply to DHBs, but does not mention ss 19 to 24.
[404] In the meantime I agree with Arnold J that the most appropriate course is to recognise that Lord Templeman’s formula in Mercury Energy is not exhaustive, and the law can be developed incrementally by analogy.
[405] Finally, given Arnold J’s comments in [342] and [343], I would make these brief observations. Judicial review cases have become much more complex than they were twenty years ago. I am not convinced that makes them necessarily non-justiciable as such. But undoubtedly Arnold J’s observations in [344] are relevant to the issue I opened my judgment on: should the courts allow what may be thought to be more like private law issues to be litigated in public law drag?
Solicitors:
Russell McVeagh, Auckland for Appellant
Wilson Harle, Auckland for First Respondents
Chapman Tripp, Auckland for Second Respondent
Lowndes Jordan, Auckland for Third Respondent
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